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BlackBerry deal tests limits on M&A creativity

Is the Fairfax bid for BlackBerry fully financed or not?

According to Bloomberg News yesterday, it doesn’t appear so:

The Fairfax (FFH:TSX) coalition, which hasn’t been identified, is in flux and new investors could join while financing is lined up, said a person familiar with the matter.

Which begs a rather central question. How is there “certain value for shareholders”, as was released in a filing, if the necesary debt and equity financing isn’t firm? Fairfax may well be “highly confident that the consortium can fund the full amount of the consideration and all related transaction fees and expenses”, but that’s not the same thing as offering a fully-financed bid. In my life I can’t recall a ~$5 billion cash takeover bid being announced without the financing being lined up in advance. Often, the Regulators don’t allow such a tactic. According to Fairfax, they are working with Bank of America and Bank of Montreal to line up some debt financing — I’m guessing $1 billion tops — although the insurer has no plans to put in another penny beyond rolling the company’s current 9% BBRY stake (valued around $460 million).

Compare that to Michael Dell’s going-private of his company, where Mr. Dell rolled his 16% stake plus contributed another meaningful quantum of new dough to bring his partner Silver Lake on board. (As an aside, in months past Silver lake has let it be known that they aren’t going to be doing a BlackBerry deal, leaving CPP Investment BoardB without its Skype winger.)

Not that yesterday’s news came as a surprise to readers of this space, since the lack of a strategic acquiror was all but telegraphed by Friday’s massive restructuring (see my post from 6 hours before Fairfax’s announcement “BlackBerry moves suggest M&A process failing to produce a strategic buyer” Sept. 23-13). But, to be honest, Fairfax’s press release has the hallmarks of a no-downside strategy, provided the Regulators don’t take issue with it. Since Fairfax already owns what it owns, in the absence of a bidder, it might as well take the company private and see what can be done without the public glare of a quarterly financial reporting period. And by not putting up another dime of new money into the go-private proposal, Fairfax shareholders aren’t risking any more capital on a BlackBerry turnaround than they had exposed to the name, say, six months ago.

Whether or not that key fact should give confidence to the pensioners who are being asked to finance the balance of the equity needed to make the Fairfax deal happen is another thing.

I’m glad that Prem Watsa has been in discussions with BlackBerry co-founder Mike Lazaridis, if the media reports are true, as I think Mike’s connection to BBRY as an enterprise offering could help with the anounced return to a corporately-focused service offering. Catherine and I talked about that weeks ago on BNN’s Business Day show, and Mike’s presence could add to the attractiveness of the pitch being made right now to CPPIB, Teachers, CDP and HOOPP (see prior post “Lazaridis puts $50M where his mouth is” July 12-12). According to my market pals. AIMCo and PSP have made it clear that they’re not playing, and I’d be stunned if OP Trust or OMERS came on board the Fairfax bid, either. OP Trust is keen on predictable cash flow and OMERS just walked away from Public Mobile, a Canadian wireless start-up.

As high profile as the situation is, as takeover bids go, this one is incredibly unusual for two reasons. First, the Class Action lawyers will have a hard time believing there was no coordination between the Company’s 3pm Friday announcement of a $1 billion writedown and 4,500 layoffs with the noon Monday takeover proposal. Barely four market trading hours separated the two events. You can just hear the plaintiff lawyers now: “Fred Astaire and Ginger Rogers had nothing on these two.”

More importantly, unlike a “stalking horse bid” in a bankruptcy action, there is no BlackBerry bid today. There is no actual floor to the auction, as much as some commentators might claim. The current bidder isn’t stuck with the deal if no one else shows up to the party, unlike a true Stalking Horse proposal. There’s merely the premise of a bid in exchange for a break fee. And the premise of a bid existed immediately after Mr. Watsa stepped down from the BlackBerry board last month.

One can understand why Mr. Watsa wanted to add some momentum to what appeared to be a lethargic auction. But an unfinanced LOI isn’t going to fool any serious buyer. I don’t think Microsoft will suddenly try to top him at $11/share. If they want the company, they now know they can buy it for in and around US$9.00 a share. The BlackBerry Board has telegraphed that figure. Perhaps that’s the new reality, but to think that’s the outcome for a company which was once (just like Nortel) the most valuable publicly-traded company in Canada.

(disclosure – this post, like all blogs, is an Opinion Piece)

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2 Comments  comments 

2 Responses

  1. garner

    Agreed. Except the write down is for the benefit of all buyers as it effectively drives the share price down and the balance sheet. Re the 9$ price. Other buyers could offer that or less and if they had firm financing it would force PW to prove that the has the financing. In fact if I was a buyer I would offer less but with firm financing and then see what happens. It might save me paying the break fee.
    CIBC did an interesting analysis. $4.7b purchase price but you are getting 2.6b of cash.? How long will that last.? If it’s not going to disappear that means balance of purchase is $2.1 b for the balance of the assets. Of course everyone has a view as to what those assets are worth. I would hope that after severance costs there would be a good chunk of cash left and that the non cash assets have a value in excess of 2.1b. So what this the risk. Could you borrow a billion against the assets. That depends on cash flow. Well after all the layoffs costs decline and it becomes a question of how much revenues decline and how fast Bb can convert the inventory they just wrote down – into cash. Also how solid is service income. One thing I would bet on is that Bb won’t be paying any taxes as I suspect they have a nice big pool of tax losses. So all cash flows might be free of tax. That could be attractive to a buyer who can put in a profitable business that would also be sheltered by the tax losses. All a buyer needs is assurance that the combination of asset value and future tax free cash flows can cover the purchase price And the sooner the better. If you can get the banks to lend a chunk and the pensions to invest a chunk and you had ML in the mix you might have a shot with a manageable downside. But pensions are pretty conservative. If they go for this deal it would be a significant expression of confidence.

  2. Andrew

    You nailed it. This seems like an attempt to get someone else to step up, nothing more. If he really wanted the company why not wait another week or two and offer $5? What is stopping him from pulling his bid and lowering it in the next few weeks?

    Nice that Mr. Heins is getting a $55,000,000 payout for his troubles, shareholders must be happy.

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